I first bought shares of Bank of Ireland (OTC:IREBY) in March of 2012 at a price of $6.98 with a plan to profit from the eventual recovery of the Irish economy after the financial crisis of 2008. But I recently sold two-thirds of my stake in the stock for a nice gain, even though the share price is still more than 95% lower than it was at the company's peak market cap prior to the collapse. Why don't I see a return to pre-crisis levels for Bank of Ireland stock? Frankly put, comparing a current share of the company's stock to a pre-crisis share is like comparing night to day.
Don't get trapped
When tough times hit the economy, banks' share prices get hammered. Bank of Ireland is not the first bank stock that I have bought after witnessing a collapse in share price. In early 2009, I rode the recovery in Bank of America from around $10 per share to my selling point at around $17.50, a nice 75% gain in a matter of months. These fire sales make for great investing opportunities if you avoid two traps:
1. You must pick a bank that will survive the recession. Banks battered by a downturn in the economy will recover and grow stronger eventually. But the ones that go under tend to stay under, at least when it comes to their shareholders.
2. As a shareholder, when a bank decides that it is willing to do whatever it takes to survive, you might want to avoid some of the options that are brought to the table.
Let's look at a long-term chart of Bank of Ireland:
Yikes. That looks like something out of a horror movie. If I knew nothing about the story behind the Bank of Ireland, and all I had to go by was this chart and the recent statement by Fitch proclaiming their expectation that IRE will return to profitability in 2014, I would think that, at $16.50, Bank of Ireland is a heck of a bargain!
So why did I sell two-thirds of my Bank of Ireland shares on February 14 at $18.75? I'll give you a hint: it wasn't because I needed cash for my wife's Valentine's Day gift. According to this chart, B of I was trading at $900 a share seven years ago. The same bank, the same country, the same stock market, right? But is Bank of Ireland the same stock it was back then? The answer to that question is absolutely not.
The biggest difference between 2007 Bank of Ireland and the 2014 version is share count. Back in 2007, IRE (the ADR for Bank of Ireland that trades on the NYSE) had a share count of less than 250 million. Now it has a share count of 753 million! But the story gets much worse. In October of 2011, Bank of Ireland effected a 10:1 reverse stock split on IRE, meaning that the company's share count was divided by 10. Yet there are now still more than three times the number of shares as there was in 2007!
Even if Bank of Ireland were exactly the same bank as it was in 2007, a single share of IRE now represents about 96.7% less ownership of the company than it did in 2007. And that's if the bank were exactly the same bank as it was. It is not. As of the last annual report, Bank of Ireland generated a yearly revenue of around $8 billion compared to the $21 billion in revenue it brought in in 2008.
What should we realistically expect from the new Bank of Ireland?
So while Bank of Ireland at $16.50 may appear to be the bargain of the century, the numbers tell a different story. If you have dreams of the company reaching $900 per share, sorry, it ain't gonna happen. First of all, IRE never traded near $900 prior to the downturn. The chart above has been adjusted to account for the reverse-split by multiplying all share prices prior to the reverse-split by 10. But if you thought $90 per share was a fair price for Bank of Ireland back in 2007, what would a fair price be now? By dividing by 3 to compensate for the share dilution, we get $30. Then, by dividing by 2.6 to correct for the drop in revenue, we get $11.54 per share. Hmmm... suddenly B of I isn't looking so cheap anymore.
This math is an oversimplification of an extremely complicated company, but it does paint a rough picture of what has happened to Bank of Ireland's stock in the past seven years. As the Irish economy continues to recover from the recession in the coming years, hopefully shareholders will continue to profit from the company's slow return to prosperity. Just don't expect a return to pre-crisis levels for IRE share price.